TEST BANK COST ACCOUNTING 15TH EDITION HORNGREN chapter 2

Cost Accounting, 15e (Horngren/Datar/Rajan)
Chapter 2 An Introduction to Cost Terms and Purposes
Objective 2.1
1) An actual cost is ________.
A) is the cost incurred
B) is a predicted or forecasted cost
C) is anything for which a cost measurement is desired
D) is the collection of cost data in some organized way by means of an accounting system
Answer: A
Diff: 1
Objective: 1
AACSB: Analytical thinking

2) Comparing budgeted costs to actual costs helps managers to improve ________.
A) coordination
B) control
C) implementation
D) planning
Answer: B
Diff: 1
Objective: 1
AACSB: Analytical thinking

3) Budgeted costs are ________.
A) the costs incurred this year
B) the costs incurred last year
C) planned or forecasted costs
D) competitor's costs
Answer: C
Diff: 1
Objective: 1

AACSB: Analytical thinking

4) Cost assignment ________.
A) includes future and arbitrary costs
B) encompasses allocating indirect costs to a cost object
C) is the same as cost accumulation
D) is the difference between budgeted and actual costs
Answer: B
Diff: 1
Objective: 1
AACSB: Analytical thinking

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5) A cost system determines the cost of a cost object by ________.
A) accumulating and then assigning costs
B) accumulating costs
C) assigning and then accumulating costs
D) assigning costs
Answer: A
Diff: 1
Objective: 1
AACSB: Analytical thinking

6) A cost object is anything for which a cost measurement is desired.
Answer: TRUE
Diff: 1
Objective: 1

AACSB: Analytical thinking

7) Costs are accounted for in two basic stages: assignment followed by accumulation.
Answer: FALSE
Explanation: Costs are accounted for in two basic stages: accumulation followed by
assignment.
Diff: 1
Objective: 1
AACSB: Analytical thinking

8) An actual cost is the cost incurred–a historical or past cost.
Answer: TRUE
Diff: 1
Objective: 1
AACSB: Analytical thinking

9) Accountants define a cost as a resource to be sacrificed to achieve a specific objective.
Answer: TRUE
Diff: 1
Objective: 1
AACSB: Analytical thinking

10) A cost is a resource sacrificed or forgone to achieve a specific objective.
Answer: TRUE
Explanation: A cost object could be anything management wishes to determine the cost of,
for example, a department.
Diff: 1
Objective: 1
AACSB: Analytical thinking

11) Managers use cost accumulation data to make decisions and implement them.
Answer: TRUE
Diff: 1
Objective: 1
AACSB: Analytical thinking

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12) Lucas Manufacturing has three cost objects that it uses to accumulate costs for its
manufacturing plants. They are:
Cost object #1:
Cost object #2:
Cost object #3:

The physical buildings and equipment
The use of buildings and equipment
The availability and use of manufacturing labor

The following manufacturing overhead cost categories are found in the accounting records:
a. Depreciation on buildings and equipment
b. Lubricants for machines
c. Property insurance
d. Supervisors salaries
e. Fringe benefits
f. Property taxes
g. Utilities
Required:
Assign each of the above costs to the most appropriate cost object.

Answer:
Cost object # 1 includes categories a, c, and f.
Cost object # 2 includes categories b and g.
Cost object # 3 includes categories d and e.
Diff: 2
Objective: 1
AACSB: Application of knowledge

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Objective 2.2
1) Which of the following factors affect the direct/indirect classification of a cost?
A) the level of budgeted profit for the next year
B) the estimation of time required to complete the order
C) the ability to execute an order in the most cost-efficient manner
D) the design of the operation
Answer: D
Diff: 1
Objective: 2
AACSB: Analytical thinking

2) The general term used to identify both the tracing and the allocation of accumulated
costs to a cost object is ________.
A) cost accumulation
B) cost assignment
C) cost tracing
D) conversion costing
Answer: B

Diff: 1
Objective: 1
AACSB: Analytical thinking

3) Cost accumulation is ________.
A) the collection of cost data in some organized way by means of an accounting system
B) anything for which a cost measurement is desired
C) anything for which a profit measurement is desired
D) the collection of profit data in some organized way by means of an accounting system
Answer: A
Diff: 2
Objective: 1
AACSB: Analytical thinking

4) Which of the following statements about the direct/indirect cost classification is true?
A) Indirect costs are always traced.
B) Indirect costs are always allocated.
C) The design of sales target affects the direct/indirect classification.
D) The direct/indirect classification depends on the cost control measures.
Answer: B
Diff: 1
Objective: 2
AACSB: Analytical thinking

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5) Cost tracing is ________.
A) the assignment of direct costs to the chosen cost object

B) a function of cost allocation
C) the process of tracking both direct and indirect costs associated with a cost object
D) the process of determining the actual cost of the cost object
Answer: A
Diff: 1
Objective: 2
AACSB: Analytical thinking

6) Cost allocation is ________.
A) the process of tracking both direct and indirect costs associated with a cost object
B) the process of determining the opportunity cost of a cost object chosen
C) the assignment of indirect costs to the chosen cost object
D) made based on material acquisition document
Answer: C
Diff: 1
Objective: 2
AACSB: Analytical thinking

7) The determination of a cost as either direct or indirect depends upon the ________.
A) accounting standards
B) tax system chosen
C) inventory valuation
D) cost object chosen
Answer: D
Diff: 1
Objective: 2
AACSB: Analytical thinking

8) Classifying a cost as either direct or indirect depends upon ________.
A) the behavior of the cost in response to volume changes

B) whether the cost is expensed in the period in which it is incurred
C) whether the cost can be easily traced with the cost object
D) whether a cost is fixed or variable
Answer: C
Diff: 1
Objective: 2
AACSB: Analytical thinking

9) A manufacturing plant produces two product lines: golf equipment and soccer equipment.
An example of direct costs for the golf equipment line is ________.
A) beverages provided daily in the plant break room
B) monthly lease payments for a specialized piece of equipment needed to manufacture the
golf driver
C) salaries of the clerical staff that work in the company administrative offices
D) overheads incurred in producing both golf and soccer equipment
Answer: B
Diff: 1
Objective: 2
AACSB: Application of knowledge

10) A manufacturing plant produces two product lines: golf equipment and soccer
equipment. An example of indirect cost for the soccer equipment line is the ________.
A) material used to make the soccer balls
B) labor to shape the leather used to make the soccer ball
C) material used to manufacture the soccer studs
D) salary paid to plant supervisor

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Answer: D

Diff: 1
Objective: 2
AACSB: Application of knowledge

11) Which one of the following items is a direct cost?
A) Customer-service costs of a multiproduct firm; Product A is the cost object.
B) Printing costs incurred for payroll check processing; payroll check processing is the cost
object.
C) The salary of a maintenance supervisor in a multiproduct manufacturing plant; Product B
is the cost object.
D) Utility costs of the administrative offices; the accounting department is the cost object.
Answer: B
Diff: 1
Objective: 2
AACSB: Application of knowledge

12) Indirect manufacturing costs ________.
A) can be traced to the product that created the costs
B) can be easily identified with the cost object
C) generally include the cost of material and the cost of labor
D) may include both variable and fixed costs
Answer: D
Diff: 1
Objective: 2
AACSB: Application of knowledge

13) Which of the following is true of indirect costs?

A) Indirect costs are always considered sunk costs.
B) All indirect costs are included in cost of goods sold.
C) Indirect costs always vary in direct proportion to the level of production.
D) Indirect costs cannot be traced to a particular cost object in an economically feasible way.
Answer: D
Diff: 1
Objective: 2
AACSB: Application of knowledge

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14) Which of the following statements is true?
A) A direct cost of one cost object will always be a direct cost of another cost object.
B) Because of a cost-benefit tradeoff, some direct costs may be treated as indirect costs.
C) All fixed costs are indirect costs.
D) All direct costs are variable costs.
Answer: B
Diff: 1
Objective: 2
AACSB: Analytical thinking

15) Which of the following statements is true of direct costs?
A) A direct cost of one cost object is a true sense of the budgeted costs.
B) All variable costs are direct costs.
C) A direct cost of one cost object can be an indirect cost of another cost object.
D) All fixed costs are direct costs.
Answer: C
Diff: 1

Objective: 2
AACSB: Application of knowledge

16) A cost may be direct for one cost object and indirect for another cost object.
Answer: TRUE
Diff: 1
Objective: 2
AACSB: Application of knowledge

17) Assigning indirect costs is easier than assigning direct costs.
Answer: FALSE
Explanation: Tracing direct costs is quite straightforward, whereas assigning indirect costs
to a number of different cost objects can be very challenging.
Diff: 1
Objective: 2
AACSB: Application of knowledge

18) Improvements in information-gathering technologies are making it possible to trace
more costs as direct.
Answer: TRUE
Diff: 1
Objective: 2
AACSB: Analytical thinking

19) The smaller the amount of a cost the more likely it is economically feasible to trace it to
a particular cost object.
Answer: FALSE
Explanation: The smaller the amount of a cost the less likely it is economically feasible to
trace it to a particular cost object.
Diff: 1

Objective: 2
AACSB: Application of knowledge

20) A direct cost of one cost object can be an indirect cost of another cost object.
Answer: TRUE
Diff: 1
Objective: 2
AACSB: Analytical thinking

21) The cost of electricity used in the production of multiple products would be classified as
a indirect cost.
Answer: TRUE

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Diff: 1
Objective: 2
AACSB: Application of knowledge

22) The broader the cost object definition, higher the proportion of direct costs are of total
costs.
Answer: TRUE
Diff: 1
Objective: 2
AACSB: Analytical thinking

23) The distinction between direct and indirect costs is clearly set forth in Generally
Accepted Accounting Principles (GAAP).

Answer: FALSE
Explanation: The distinction between direct and indirect costs is not set forth in GAAP. Direct
costs of a cost object are related to the particular cost object and can be traced to it in an
economically feasible (cost-effective) way. Indirect costs of a cost object are related to the
particular cost object but cannot be traced to it in an economically feasible (cost-effective)
way.
Diff: 1
Objective: 2
AACSB: Analytical thinking

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24) Archambeau Products Company manufactures office furniture. Recently, the company
decided to develop a formal cost accounting system and classify all costs into three
categories. Categorize each of the following items as being appropriate for (1) cost tracing
to the finished furniture, (2) cost allocation of an indirect manufacturing cost to the finished
furniture, or (3) as a nonmanufacturing item.
Item

Cost
Tracing

Cost
Allocation

Nonmanufacturing

Carpenter wages

Depreciation - office building
Glue for assembly
Lathe department supervisor
Lathe depreciation
Lathe maintenance
Lathe operator wages
Lumber
Samples for trade shows
Metal brackets for drawers
Factory washroom supplies
Answer:
Item

________
________
________
________
________
________
________
________
________
________
________
Cost
Tracing

________
________
________

________
________
________
________
________
________
________
________
Cost
Allocation

________
________
________
________
________
________
________
________
________
________
________
Nonmanufacturing

Carpenter wages
Depreciation - office building
Glue for assembly
Lathe department supervisor
Lathe depreciation
Lathe maintenance

Lathe operator wages
Lumber
Samples for trade shows
Metal brackets for drawers
Factory washroom supplies

X

X
X
X
X
X

X
X
X

X
X

Diff: 2
Objective: 2
AACSB: Application of knowledge

25) What are the factors that affect the classification of a cost as direct or indirect?
Answer: Several factors affect whether a cost is classified as direct or indirect:
The materiality of the cost in question. The smaller the amount of a cost–that is, the
more immaterial the cost is–the less likely it is economically feasible to trace it to a
particular cost object.

Available information-gathering technology. Improvements in information-gathering
technology make it possible to consider more and more costs as direct costs.
Design of operations. Classifying a cost as direct is easier if a company's facility (or some
part of it) is used exclusively for a specific cost object, such as a specific product or a
particular customer.
Diff: 3
Objective: 2
AACSB: Analytical thinking

26) What are the differences between direct costs and indirect costs? Give an example of
each.
Answer: Direct costs are costs that can be traced easily to the product manufactured or the
service rendered. Examples of direct costs include direct materials and direct manufacturing
labor used in a product. Indirect costs cannot be easily identified with individual products or

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services rendered, and are usually assigned using allocation formulas. In a plant that
manufactures multiple products, examples of indirect costs include the plant supervisor's
salary and the cost of machines used to produce more than one type of product.
Diff: 2
Objective: 2
AACSB: Analytical thinking

Objective 2.3
1) Which of the following is true if the volume of sales increases?
A) fixed cost increases
B) variable cost decreases

C) variable cost increases
D) fixed cost decreases
Answer: C
Diff: 1
Objective: 3
AACSB: Application of knowledge

2) Which of the following is a fixed cost?
A) monthly rent payment
B) electricity expenses
C) travel expenses
D) direct material costs
Answer: A
Diff: 1
Objective: 3
AACSB: Application of knowledge

3) Cost behavior refers to ________.
A) how costs react to a change in the level of activity
B) whether a cost is incurred in a manufacturing, merchandising, or service company
C) classifying costs as either perpetual or period costs
D) whether a particular expense is expensed in the same or the following period
Answer: A
Diff: 1
Objective: 3
AACSB: Analytical thinking

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4) Which of the following is true if the production volume decreases?
A) fixed cost per unit increases
B) average cost per unit decreases
C) variable cost per unit increases
D) variable cost per unit decreases
Answer: A
Diff: 1
Objective: 3
AACSB: Application of knowledge

5) At a plant where a union agreement sets annual salaries and conditions, annual labor
costs usually ________.
A) are considered a variable cost
B) are considered a fixed cost
C) depend on the scheduling of floor workers
D) depend on the scheduling of production runs
Answer: B
Diff: 1
Objective: 3
AACSB: Analytical thinking

6) Variable costs ________.
A) are always indirect costs
B) increase in total when the actual level of activity increases
C) include most personnel costs and depreciation on machinery
D) are never considered a part of prime cost
Answer: B
Diff: 1
Objective: 3

AACSB: Analytical thinking

7) Maize Plastics manufactures and sells 50 bottles per day. Fixed costs are $30,000 and the
variable costs for manufacturing 50 bottles are $10,000. Each bottle is sold for $1,000. How
would the daily profit be affected if the daily volume of sales drop by 10%?
A) profits are reduced by $4,000
B) profits are reduced by $1,000
C) profits are reduced by $5,000
D) profits are reduced by $6,000
Answer: A
Explanation: A) Variable cost per unit = $10,000 / 50 = $200
Profit for 50 bottles = ($1,000 × 50) - ($30,000 + $10,000) = $10,000
Sales after 10% drop = 50 × (1 - 0.10) = 45
Profit for 45 bottles = ($1,000 × 45) - ($30,000 + (45 × 200))= $6,000
Change in profit = $10,000 - $6,000 = $4,000. Hence, the profit has decreased by $4,000.
Diff: 3
Objective: 3
AACSB: Application of knowledge

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8) Fixed costs depend on the ________.
A) amount of resources used
B) amount of resources acquired
C) volume of production
D) total number of units sold
Answer: B
Diff: 1

Objective: 3
AACSB: Analytical thinking

9) Which one of the following is a variable cost for an insurance company?
A) rent of the building
B) CEO's salary
C) electricity expenses
D) property taxes
Answer: C
Diff: 1
Objective: 3
AACSB: Application of knowledge

10) Which of the following is a fixed cost for an automobile manufacturing plant?
A) administrative salaries
B) electricity used by assembly-line machines
C) sales commissions
D) tires
Answer: A
Diff: 1
Objective: 3
AACSB: Application of knowledge

11) If each motorcycle requires a belt that costs $20 and 2,000 motorcycles are produced for
the month, the total cost for belts is ________.
A) considered to be a direct fixed cost
B) considered to be a direct variable cost
C) considered to be an indirect fixed cost
D) considered to be an indirect variable cost
Answer: B

Diff: 1
Objective: 3
AACSB: Application of knowledge

12) The most likely cost driver of distribution costs is the ________.
A) number of parts within the product
B) number of miles driven
C) number of products manufactured
D) number of production hours
Answer: B
Diff: 1
Objective: 3
AACSB: Application of knowledge

13) The most likely cost driver of direct labor costs is the ________.
A) number of machine setups for the product
B) number of miles driven
C) number of production hours
D) number of machine hours
Answer: C
Diff: 1

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Objective: 3
AACSB: Application of knowledge

14) Which of the following statements is true?

A) There is a cause-and-effect relationship between the cost driver and the amount of cost.
B) Fixed costs have cost drivers over the short run.
C) Over the short run all costs have cost drivers.
D) Volume of production is a cost driver of distribution costs.
Answer: A
Diff: 1
Objective: 3
AACSB: Analytical thinking

15) A band of normal activity or volume in which specific cost-volume relationships are
maintained is referred to as the ________.
A) average range
B) cost-allocation range
C) cost driver range
D) relevant range
Answer: D
Diff: 1
Objective: 3
AACSB: Analytical thinking

16) Within the relevant range, if there is a change in the level of the cost driver, then
________.
A) total fixed costs and total variable costs will change
B) total fixed costs and total variable costs will remain the same
C) total fixed costs will remain the same and total variable costs will change
D) total fixed costs will change and total variable costs will remain the same
Answer: C
Diff: 2
Objective: 3
AACSB: Analytical thinking

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17) Outside the relevant range, variable costs, such as direct material costs ________.
A) will decrease proportionately with changes in sales volumes
B) will remain the same with changes in production volumes
C) will not change proportionately with changes in production volumes
D) will increase proportionately with changes in sales volumes
Answer: C
Diff: 2
Objective: 3
AACSB: Analytical thinking

18) Which of the following is a cost driver for a company's human resource costs?
A) the number of employees in the company
B) the number of job applications processed
C) the number of units sold
D) the square footage of the office space used by the human resource department
Answer: B
Diff: 1
Objective: 3
AACSB: Analytical thinking

Answer the following questions using the information below:
Zephyr Apparels is a clothing retailer. Unit costs associated with one of its products, Product
DCT121, are as follows:
Direct materials
$ 70

Direct manufacturing labor
20
Variable manufacturing overhead15
Fixed manufacturing overhead 32
Sales commissions (2% of sales) 5
Administrative salaries
16
Total
$158
19) What are the direct variable manufacturing costs per unit associated with Product
DCT121?
A) $142
B) $90
C) $105
D) $110
Answer: C
Explanation: C) Direct variable manufacturing costs = $70 + $20 + $15 = $105
Diff: 1
Objective: 3
AACSB: Application of knowledge

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20) What are the indirect nonmanufacturing variable costs per unit associated with Product
DCT121?
A) $5
B) $21
C) $90

D) $142
Answer: A
Explanation: A) Indirect variable costs = Sales commissions = $5
Diff: 1
Objective: 3
AACSB: Application of knowledge

Answer the following questions using the information below:
The East Company manufactures several different products. Unit costs associated with
Product ORD210 are as follows:
Direct materials
$54
Direct manufacturing labor
8
Variable manufacturing overhead11
Fixed manufacturing overhead 25
Sales commissions (2% of sales) 5
Administrative salaries
12
Total
$115
21) What is the percentage of the total variable costs per unit associated with Product
ORD105 with respect to total cost?
A) 72%
B) 68%
C) 75%
D) 70%
Answer: A
Explanation: A) $60 + $10 + $15 + $5 = $90/125 = 72%
Diff: 3

Objective: 3
AACSB: Application of knowledge

22) What is the percentage of the total fixed costs per unit associated with Product ORD105
with respect to total cost?
A) 32%
B) 28%
C) 26%
D) 20%
Answer: B
Explanation: B) $25 + 10 = $35/125 = 28%
Diff: 3
Objective: 3
AACSB: Application of knowledge

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23) A fixed cost is fixed only in relation to a given wide range of total activity or volume and
only for a given
time span, usually a particular budget period.
Answer: TRUE
Diff: 2
Objective: 3
AACSB: Application of knowledge

24) A cost driver is a variable, such as the level of activity or volume that causally affects
costs over a given time span.
Answer: TRUE

Diff: 1
Objective: 3
AACSB: Analytical thinking

25) Fixed cost per unit reduces with an increase in production volume.
Answer: TRUE
Diff: 2
Objective: 3
AACSB: Analytical thinking

26) Variable costs per unit vary with the level of production or sales volume.
Answer: FALSE
Explanation: Variable costs per unit are constant with the level of production or sales
volume.
Diff: 2
Objective: 3
AACSB: Analytical thinking

27) Wood used to manufacture chairs is considered a direct variable cost.
Answer: TRUE
Diff: 1
Objective: 3
AACSB: Analytical thinking

28) Variable costs depend on the resources used.
Answer: FALSE
Diff: 1
Objective: 3
AACSB: Analytical thinking

29) A fixed cost remains unchanged in total for a given time period, despite wide changes in
the related level
of total activity or volume of output produced.
Answer: TRUE
Diff: 1
Objective: 3
AACSB: Analytical thinking

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30) An appropriate cost driver for shipping costs might be the number of units shipped.
Answer: TRUE
Diff: 1
Objective: 3
AACSB: Analytical thinking

31) Butler Hospital wants to estimate the cost for each patient stay. It is a general health
care facility offering only basic services and not specialized services such as organ
transplants.
Required:
a. Classify each of the following costs as either direct or indirect with respect to each
patient.
b. Classify each of the following costs as either fixed or variable with respect to hospital
costs per day.
Direct

Indirect

Fixed

Variable

Electronic monitoring
Meals for patients
Nurses' salaries
Parking maintenance
Security
Answer:

________
________
________
________
________
Direct

________
________
________
________
________
Indirect

________ ________
________ ________
________ ________
________ ________
________ ________

Fixed Variable

Electronic monitoring
Meals for patients
Nurses' salaries
Parking maintenance
Security

X
X

X
X

Diff: 3
Objective: 2, 3
AACSB: Application of knowledge

X
X
X

X
X
X

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32) The list of representative cost drivers in the right column below are randomized with
respect to the list of functions in the left column. That is, they do not match.
1.
2.
3.
4.
5.
6.

Function
Purchasing
Billing
Shipping
Computer Support
Personnel
Customer Service

A.
B.
C.
D.
E.
F.

Representative Cost Driver
Number of employees
Number of shipments
Number of customers
Number of invoices
Number of desktop computers

Number of purchase orders

Required:
Match each business function with its representative cost driver.

1.
2.
3.
4.
5.
6.

Function
Purchasing
Billing
Shipping
Computer Support
Personnel
Customer Service

Insert letter of appropriate driver (A
through F)

Answer:
1.
2.
3.
4.
5.
6.

Function
Purchasing
Billing
Shipping
Computer Support
Personnel
Customer Service

Insert letter of appropriate driver (A
through F)
F
D
B
E
A
C

Diff: 3
Objective: 3
AACSB: Application of knowledge

33) Describe a variable cost. Describe a fixed cost. Explain why the distinction between
variable and fixed costs is important in cost accounting.
Answer: Total variable costs increase with increased production or sales volumes. Fixed
costs are not influenced by fluctuations in production or sales volumes. However, variable
cost per unit remains the same at all levels of production and fixed cost per unit reduces
with increase in production. Without the knowledge of cost behaviors, budgets and other
forecasting tools will be inaccurate and unreliable. Understanding whether a cost behaves as
a variable or a fixed cost is essential to estimating and planning for business success.

Diff: 3
Objective: 3
AACSB: Analytical thinking

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Objective 2.4
1) A unit cost is computed by ________.
A) multiplying total cost by the number of units produced
B) dividing total cost by the number of units produced
C) dividing variable cost by the number of units produced
D) dividing fixed cost by the number of units produced
Answer: B
Diff: 1
Objective: 4
AACSB: Analytical thinking

2) In making product mix and pricing decisions, managers should focus on ________.
A) total costs
B) unit costs
C) variable costs
D) manufacturing costs
Answer: A
Diff: 2
Objective: 4
AACSB: Analytical thinking

3) When 20,000 units are produced, fixed costs are $16 per unit. Therefore, when 16,000

units are produced, fixed costs will ________.
A) increase to $20 per unit
B) remain at $16 per unit
C) decrease to $10 per unit
D) total $160,000
Answer: A
Explanation: A) Fixed costs are $320,000 ($16 × 20,000 units). Dividing $320,000 by 16,000
units = $20.
Diff: 3
Objective: 4
AACSB: Application of knowledge

4) When 20,000 units are produced, variable costs are $8 per unit. Therefore, when 10,000
units are produced ________.
A) variable costs will remain at $8 per unit
B) variable costs will total $60,000
C) variable unit costs will increase to $12 per unit
D) variable unit costs will decrease to $3 per unit
Answer: A
Diff: 2
Objective: 4
AACSB: Application of knowledge

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5) Eigen Manufacturing Corp. provided the following information for last month:
Sales
Variable costs

Fixed costs
Operating income

$40,000
14,000
10,000
$16,000

If sales reduce to half of the amount in the next month, what is the projected operating
income?
A) $15,000
B) $6,000
C) $16,000
D) $3,000
Answer: D
Explanation: D) Projected operating income = ($40,000 / 2) − ($14,000 / 2) − $10,000 =
$3,000
Diff: 3
Objective: 4
AACSB: Application of knowledge

6) Genosis Metals provided the following information for last month:
Sales
Variable costs
Fixed costs
Operating income

$20,000
8,000
4,000

$8,000

If sales reduce to half the amount in the next month, what is the projected operating
income?
A) $0
B) $4,000
C) $2,000
D) $6,000
Answer: C
Explanation: C) Projected operating income = ($20,000 × 0.5) − ($8,000 × 0.5) − $4,000 =
$2,000
Diff: 3
Objective: 4
AACSB: Application of knowledge

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7) Grip Manufacturing currently produces 1,000 tires per month. The following per unit data
for 1,000 tires apply for sales to regular customers:
Direct materials
$30
Direct manufacturing labor
5
Variable manufacturing overhead 8
Fixed manufacturing overhead 12
Total manufacturing costs
$55
The plant has capacity for 3,000 tires and is considering expanding production to 2,000 tires.

What is the total cost of producing 2,000 tires?
A) $110,000
B) $98,000
C) $68,000
D) $88,000
Answer: B
Explanation: B) Total cost of producing 2,000 tires = [($30 + $5 + $8) × 2,000 units] + ($12
× 1,000 units) = $98,000
Diff: 3
Objective: 4
AACSB: Application of knowledge

8) XIAN Manufacturing produces a unique valve, and has the capacity to produce 50,000
valves annually. Currently XIAN produces 40,000 valves and is thinking about increasing
production to 45,000 valves next year. What is the most likely behavior of total
manufacturing costs and unit manufacturing costs given this change?
A) Total manufacturing costs will increase and unit manufacturing costs will stay the same.
B) Total manufacturing costs will increase and unit manufacturing costs will decrease.
C) Total manufacturing costs will stay the same and unit manufacturing costs will stay the
same.
D) Total manufacturing costs will increase and unit manufacturing costs will also increase.
Answer: B
Diff: 2
Objective: 4
AACSB: Application of knowledge

21
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9) Ridez Manufacturing currently produces 1,000 bicycles per month. The following per unit
data apply for sales to regular customers:
Direct materials
$50
Direct manufacturing labor
8
Variable manufacturing overhead12
Fixed manufacturing overhead 15
Total manufacturing costs $85
The plant has capacity for 3,000 bicycles and is considering expanding production to 2,000
bicycles. What is the per unit cost of producing 2,000 bicycles?
A) $78.50 per unit
B) $170 per unit
C) $72.50 per unit
D) $77.50 per unit
Answer: D
Explanation: D) Cost of producing 2,000 bicycles = [($50 + $8 + $12) × 2,000 units] + ($15
× 1,000 units) = $155,000 / 2,000 units = $77.50
Diff: 3
Objective: 4
AACSB: Application of knowledge

Answer the following questions using the information below:
Buildz Manufacturing currently produces 1,000 tables per month. The following per unit data
for 1,000 tables apply for sales to regular customers:
Direct materials
$50
Direct manufacturing labor
10
Variable manufacturing overhead15

Fixed manufacturing overhead 30
Total manufacturing costs $105
10) The plant has capacity for 3,000 tables and is considering expanding production to 3,000
tables. What is the total cost of producing 3,000 tables?
A) $255,000
B) $225,000
C) $175,000
D) $235,000
Answer: A
Explanation: A) [($50 + $10 + $15) × 3,000 units] + ($30 × 1,000 units) = $255,000
Diff: 3
Objective: 4
AACSB: Application of knowledge

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11) What is the per unit cost when producing 3,000 tables?
A) $58.33
B) $175.00
C) $85.00
D) $125.45
Answer: C
Explanation: C) $255,000 / 3,000 = $85
Diff: 2
Objective: 4
AACSB: Application of knowledge

Answer the following questions using the information below:

Pederson Company reported the following:
Manufacturing costs
Units manufactured
Units sold
Beginning inventory

$150,000
5,000
4,700 units sold for $75 per unit
100 units

12) What is the average manufacturing cost per unit?
A) $40.00
B) $42.00
C) $30.00
D) $32.00
Answer: C
Explanation: C) $150,000 / 5,000 = $30.00
Diff: 2
Objective: 4
AACSB: Application of knowledge

13) What is the manufacturing cost for the ending finished goods inventory?
A) $12,000
B) $8,000
C) $11,000
D) $5,000
Answer: A
Explanation: A) (100 + 5,000 - 4,700 ) × 30 = $12,000
Diff: 3

Objective: 4
AACSB: Application of knowledge

23
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Answer the following questions using the information below:
The following information pertains to Razor's Corp:
Manufacturing costs
Units manufactured
Units sold
Beginning inventory

$135,000
15,000
12,000 units sold for $15 per unit
$3,500

14) What is the average manufacturing cost per unit?
A) $11.00
B) $9.00
C) $11.25
D) $11
Answer: B
Explanation: B) $135,000 / 15,000 = $9.00
Diff: 2
Objective: 4
AACSB: Application of knowledge

15) What is the manufacturing cost for the ending finished goods inventory?
A) $42,500
B) $25,500
C) $18,500
D) $30,500
Answer: D
Explanation: D) Ending finished inventory = $3,500 + (15,000 - 12,000) × $9 = $30,500
Diff: 3
Objective: 4
AACSB: Application of knowledge

16) When making decisions for product mix or and pricing, the focus should be on total costs
and not unit costs.
Answer: TRUE
Diff: 1
Objective: 4
AACSB: Analytical thinking

17) Although unit costs are regularly used in financial reports and for making product mix
and pricing decisions, managers should think in terms of total costs rather than unit costs for
making decisions.
Answer: TRUE
Diff: 2
Objective: 4
AACSB: Analytical thinking

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18) A unit cost is computed by dividing total cost by the number of units.
Answer: TRUE
Diff: 1
Objective: 4
AACSB: Analytical thinking

19) A unit cost is also called an average cost.
Answer: TRUE
Diff: 1
Objective: 4
AACSB: Analytical thinking

20) Samiera, Inc., reports the following information for September sales:
Sales
$60,000
Variable costs
12,000
Fixed costs
16,000
Operating income $ 32,000
Promotional expenses for September were $1,000.
Required:
If sales double in October, what is the impact on the variable costs?
Answer: The variable costs also double up to $12,000 × 2 = $24,000. Promotional expenses
are variable costs and are already included in $12,000.
Diff: 2
Objective: 4
AACSB: Analytical thinking

21) Glass House Manufacturing currently produces 1,000 glasses per month. The following

per unit data for thousand apply for sales to regular customers:
Direct materials
$250
Direct manufacturing labor
40
Variable manufacturing overhead70
Fixed manufacturing overhead 50
Total manufacturing costs $410
The plant has capacity for 2,000 glasses. Plant supervisor's salary is $15,000.
Required:
a. What is the total cost of producing 1,000 glasses?
b. What is the total cost of producing 1,500 glasses?
c. What is the per unit cost when producing 1,500 glasses?
Answer:
a. [($250 + $40 + $70) × 1,000 units] + ($50 × 1,000 units) = $410,000
Plant supervisor's salary is already included in fixed manufacturing overhead hence not
added.
b. [($250 + $40 + $70) × 1,500 units] + $50,000 = $590,000
c. $590,000 / 1,500 = $393.33 per unit
Diff: 2
Objective: 4
AACSB: Application of knowledge

22) During 2015, Fly High Corporation incurred manufacturing expenses of $200,000 to
produce 40,000 finished units. It was determined that 35,000 units were sold by November
end while 5,000 units remained in ending inventory. The storage cost for December is $0.5
per unit.
Required:

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